This week, Southern California Edison and Pacific Gas and Electric Company requested to raise their profits for shareholders by an amount unprecedented anywhere in the country. Although the final numbers will be heavily negotiated with ratepayer advocates, the utilities and experts agree: Californians will soon see the costs of climate change in their electric bill.
SCE, PG&E, and the state's third private utility, San Diego Gas & Electric, have filed requests with state and federal regulators that would increase their customers' monthly electric bills, citing "extraordinary wildfire risk" that's left PG&E bankrupt, and made the others equally risky investments. As monopolies, these private companies must regularly submit proposals for increasing their profit margins (and raising rates to cover this) with the state regulatory body, the California Public Utility Commission.
But by many accounts, this request is unusual: According to the industry trade group Advanced Energy Economy, the average allowed return on equity—the portion a company keeps as profit—for a U.S. private utility is 10.13 percent; the highest in the country is 13.75 percent, at Alabama Power Company. (California's average allowed return was just 9.45 percent at the end of 2018.)
PG&E's request is much higher: The utility asked to increase its shareholder returns from 10.25 percent to 16 percent. In a statement, the company says that boosting its profits will attract "the critical funding necessary to invest in and increase the safety and reliability of its energy system, while also addressing the heightened risks of California's year-round wildfire season." It argues that greater profit margins will convince investors to help supply the billions of dollars in new infrastructure needed to cope with the ongoing devastation, exacerbated by climate change.
But the costs of attracting new investments will be passed off to ratepayers. According to PG&E, the average customer would see their electric bill increase by $7.85 per month. For gas, it would add an extra $4.25, starting next year.
SCE, which wants to increase its shareholder returns from 10.3 percent to more than 17 percent, has asked to add an additional component that would "compensate investors for the higher risks associated with uncertain state policies for utility cost recovery and liability resulting from California's devastating wildfires," the utility said in a statement. If this request were to be approved, SCE says its average customer would see an increase of $12.20 per month on their average monthly bill of about $100.
According to Stanford University professor Michael Wara, these return rates are unlikely to be approved. (The filings are just the first step in the process of a negotiation, and the utilities usually aim high.) However, he says they signify a failing system. "The ask is unprecedented, but the situation is kind of unprecedented as well," he says.
Regulators lower costs by ensuring these utilities are a safe investment, but thanks to climate change—and the utilities' failure to adjust to its risks—these utilities are no longer safe. "Utilities are supposed to be very low-risk investments, and that's by design," Wara says. "What's happening in California is that kind of arrangement, which has worked well in the U.S. for about 130 years, has really just broken down."
Wara argues that these filings show the utility companies are now as risky as hedge funds—and they're starting to look like them too. In the last few months, several hedge funds have considered nominating managers to PG&E's board, Bloomberg reports. After several devastating and costly fires, the utility has taken a hit: PG&E filed for bankruptcy in January, owing an estimated $30 billion in damages from previous fires, including the Camp Fire. Although the company has admitted that its infrastructure likely started the deadly blaze, climate change and increased development in the wildland-urban interface have also exacerbated fire risk.
Although no one denies climate change has played a role in the devastation, it can't clear the company under the state's current liability laws, which hold the utility responsible for damages from any fire it starts. PG&E has tried to argue that it should not be held liable for damages, hoping to get out of the billions it owes residents whose homes were destroyed. As I previously reported for Pacific Standard:
If PG&E gets out of costs due to climate change, the burden falls to either insurance companies, homeowners and business owners, public agencies, or all of the above, explains Sean Hecht, co-executive director of the Emmett Institute on Climate Change and the Environment at the University of California–Los Angeles.
"It's beyond question that climate change is one of the factors exacerbating fire risks," he says. "That doesn't necessarily mean that the company is off the hook. Someone has to pay for these costs. There's not any more or less reason for the utility to pay for those costs than the insurance companies, the government, or other institutions."
The Los Angeles Times has reported that shareholder advocates have interpreted the recent filings as a form of extortion from legislators. In its statement, SCE said something to that effect: "SCE will seek to reduce or remove this Wildfire Risk [return on equity] in the future if there is a material reduction in its wildfire risk due to regulatory or legislative reform."
Wara, who was recently appointed to a state wildfire commission, says that raising electricity rates at this level would exacerbate inequality and disproportionately harm low-income people and renters, many of whom live in the Central Valley, where they're forced to run their air conditioning during the hot summer months. But he also argues that something needs to change: The regulatory process has protected Californians' electric bills from increasing wildfire risks for years, but those risks aren't going away. "The utilities haven't done a great job of adapting [to climate change], but neither has anyone else," he says. "We haven't done these things, and we're paying the price."